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IRS Unveils New Procedures for Reinstating Tax-Exempt Status

Tax-exempt organizations
that have had their tax-exempt status
automatically revoked because they failed to file
required annual returns for three consecutive
years have new procedures for getting their exempt
status reinstated, under guidance issued by the
IRS (Rev. Proc. 2014-11). Earlier guidance
providing methods for reinstating exempt status
(Notice 2011-44) is modified and superseded.

Organizations that are exempt from tax under
Sec. 501(a) and private foundations under Sec.
4947(a)(1) are required to file an annual return
with the IRS or, if their annual gross receipts
are normally $50,000 or less, an annual notice
(Form 990-N, e-Postcard). Any
organization that fails to file the required
annual return or notice for three consecutive
years has its tax-exempt status automatically
revoked under Sec. 6033(j)(1) and must reapply to
the IRS to have its exempt status reinstated.

The new procedures include a streamlined
retroactive reinstatement process for
organizations that were eligible to file either
Form 990-EZ, Short Form Return of Organization
Exempt From Income Tax, or Form 990-N
during the years they failed to file. There are
also different retroactive reinstatement processes
for organizations to use within 15 months of the
revocation of their exempt status and beyond 15
months. And finally, the IRS is also introducing a
“post-mark date” process, under which, if an
organization does not seek retroactive
reinstatement, it can instead apply for
reinstatement from the postmark date of its
application.

Under the streamlined procedure, the
organization will have to attest that its
failure to file was not intentional and that it
has put procedures in place to file in the
future. Organizations that are not eligible for
the streamlined procedure and are applying for
reinstatement within 15 months of revocation
will have to provide facts that support their
claim that the organization had reasonable cause
for failure to file for at least one of the
three consecutive years it failed to
file.

Organizations that are applying for
reinstatement 15 months or more after revocation
will have to provide facts that support the
claim that the organization had reasonable cause
for failure to file for all three of the
consecutive years it failed to file.

Organizations will be required to file
annual returns for the years they did not file
(except for years they were required to file
only Form 990-N), and, if their application for
reinstatement is approved, the IRS will waive
failure-to-file penalties for those years.

Effective Date and
Effect on Prior Applications

The new
procedures are effective for applications
filed after Jan. 2, 2014, but the IRS says it
will also apply the new rules to applications
pending on that date, if that will benefit the
organization. Organizations that previously had
their tax-exempt status reinstated effective
from the date of their application, but that
would have been eligible for retroactive
reinstatement under the new streamlined
procedure, will be reinstated effective from
their revocation date. Organizations that
previously had their tax-exempt status
reinstated effective from the date of their
application and that would have been eligible
for retroactive reinstatement under the
other two new procedures may reapply for
retroactive reinstatement.

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The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.

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